Floyd Norris - "Why Are Banks Failing?" - Aug. 21, 2009
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What ails banks?
This morning, there were two available answers, one in my column in The Times, and another in The Wall Street Journal. I emphasized bad loans at the banks that have been failing recently; The Journal emphasized dubious securities, and pointed to the expected failure tonight of Guaranty Bank.
Both are right, of course. It seemed to me that we already knew a lot of securities were toxic; that is why the banks don’t want to let us know market values of them. But I still think we will see a lot more smaller banks fail due to bad loans.
Here’s the scorecard for tonight.
Guaranty Bank did fail, as expected. The acquiring bank took $12 billion of assets, but demanded loss sharing agreements on $11 billion of those. We don’t have details, but it appears that the acquirer trusted neither the loans nor the securities Guaranty held.
The first failure of the night was eBank of Atlanta. It appeared to own no securities, but to have lost money on real estate loans.
Another Georgia bank, First Coweta, also failed. It appears to have been done in by mortgage loans, not securities.
The fourth institution closed tonight was CapitalSouth Bank in Alabama. It has some debt securities, but they do not appear to have been a big problem. The problem was construction loans.
For what it is worth, the F.D.I.C. estimated that its losses from Guaranty would equal 23 percent of the bank’s assets. The losses from the other three ranged from 24 percent to 44 percent, with eBank being the worst.
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